Foreclosures Rise Along with Interest Rates - Is Your Florida Home Loan Safe?

In this economy, can the American Dream be an affordable reality? That’s the question many first-time home owners are wrestling with as they struggle to keep up with escalating mortgage rates.

The result? A flurry of foreclosures across the country.

Real estate experts nationwide say they are seeing a trend in which homeowners - often using adjustable-rate Florida mortgages - have been unable to keep up with fast-rising interest rates, forcing them to balance higher monthly payments against already soaring energy costs and living expenses. This makes it a good time to refinance your Florida home loan.

Making matters worse, insiders say a cooling real estate market makes it less likely that financially strapped consumers can count on rising home values and equity to bail them out.

“Many people are living on the razor’s edge,” said Kansas City mortgage attorney Berry S. Laws III. “When their interest rates go up, they automatically have to pay more for the mortgage. People are betting their homes will appreciate, but if the value of their homes flattens out, they face a deficit.”

The warning signs are everywhere:

• The Mortgage Bankers Association reports that the number of home loan delinquencies nationwide in the last quarter of 2005 grew to a 2½-year high.

• The association also noted a growing inventory of foreclosed homes, suggesting that banks are getting stuck with repossessed homes they can’t resell.

• Foreclosure.com recently reported that the total number of foreclosures listed for sale in December rose 12.7 percent, reversing a recent trend. About 92,000 foreclosed homes were on the U.S. market.

• Nationally, bank regulators worry that mortgage delinquencies and resulting foreclosures will continue to increase this year.

“Rising mortgage delinquencies in 2005 apparently mark the end of a period of generally improving mortgage loan performance between 2002 and 2005,” said Richard A. Brown, chief economist for the Federal Deposit Insurance Corp., which insures banks.

Information on various types of subprime home loans

According to FDIC statistics, the average 30-day past-due rate for subprime mortgages - those made to borrowers with limited or less than perfect credit - rose from 5.4 percent at the beginning of 2005 to 7.1 percent at year’s end, reversing an eight-year decline.

Myra Batchelder, who heads the economic opportunity program at Demos, a New York think-tank on consumer issues, sees an ominous future for many Americans.

“The recent jump in foreclosures is a sign of a much larger problem: The American household economy is at a breaking point,” Batchelder said.

She noted that Americans have withdrawn about $500 billion in home equity since 2001, often to pay credit card debts and medical bills. Indeed, consumers responding to low-interest rates and flexible terms expanded their total mortgage debt by $2 trillion in 2004 and 2005 alone, FDIC statistics show.

Now, unable to make house payments and having cashed out their equity, many consumers have seen their retirement nest eggs vanish.

Are home loan officers and lenders at fault?

Local housing experts are seeing many new foreclosures on loans less than two or three years old.

“Many of these are like brand new home loans being foreclosed on,” real estate investor Lorrie Robison said, while attending a recent foreclosure sale at the Jackson County Courthouse.

Consumers often lose their homes for preventable reasons. They refinance loans and take out equity to pay off high-cost debts, but don’t limit their spending.

“They don’t correct their spending behavior, and jump right back into credit cards,” said Bruce Morgan, chairman, president and CEO of Valley State Bank.

The lure for many Americans has been creative, non-traditional home loans that have made it all-too-easy for some people to buy homes that were too expensive for them. Many Florida home loans begin with low, teaser rates or are interest only. But interest and payments increase over time.

Some experts say lenders only have themselves to blame for the increase in foreclosures. Lulled by appreciating values and the lowest interest rates in a generation, they made riskier loans and opened up possibilities such as lease-option financing. Loans to subprime borrowers increased from $35 billion to about $332 billion between 1994 and 2003, according to one study.

A decade ago, few lenders would have accepted a borrower whose monthly debts amounted to more than 28 percent of their monthly income. But in the last two years, many lenders allowed debt-to-income ratios to climb as high as 60 percent.

As a result, troubled loans exceeded expectations. Now, the FDIC says, the number of delinquencies has grown and spread to financial institutions on the secondary mortgage market, such as Fannie Mae and Freddie Mac.

Researchers also blame delinquencies and foreclosures on predatory tactics by aggressive lenders, who offer low rates initially but hide other costs from consumers, such as balloon payments and prepayment penalties.

The difficulty of bankrupcy

Housing experts say that mortgage fraud and inflated appraisals also can lead to foreclosures on homes valued far more than they were worth. But even as lenders clamp down, some experts are predicting that the bankruptcy reform law that was adopted last year threatens to fuel an additional round of foreclosures.

The idea behind the law was to make it harder for consumers to shed debts. One big change requires credit counseling 180 days before filing for bankruptcy. This makes it more of an obstacle to successfully file and, subsequently, save your home.

The moral of this possibly troubling story? Be careful with your adjustable Florida home loan. Don’t wait too long to refinance if rates continue to soar.